Friday Letter Extremely patient capital

Private equity LPs and GPs frequently wax lyrical on their long-term investment approach. This week, one mid-market firm ‘put their money where their mouth is’ with the launch of fund that can invest for a quarter of a century.  

Roughly six months ago, PEO’s New York newsroom noticed it was being inundated with press releases from a particular PR professional who represents mid-market buyout clients. We asked him why he was so busy. “The mid-market lives!” he quipped.

Indeed, the middle market on both sides of the Atlantic is clearly alive and kicking – this week alone funds held first or final closes on commitments totalling more than $8 billion (€5.6 billion).

And at least one firm plans on outliving its mega-market peers. Yesterday, New York-based American Securities closed its fifth private equity fund, which was notable for several reasons: it raised a solid $2.3 billion (€1.6 billion), or more than double its previous fund; it exceeded its $2 billion target; and it will avoid deals that require mezzanine debt. But most significantly, American Securities has created what has the potential to be the longest-lasting private equity fund ever, having given it a 25-year investment life. Yes, you read that correctly: the partnership may remain active until 2033.

The firm’s chief executive, Michael Fisch, explained that the ability to make investments for such a long time period – more than double the 10-year industry standard – differentiated it from other fund managers, marking American Securities as a firm that has “the capital, if you will, to put their money where their mouth is and be long-term investors”.

He added that the firm’s investor base is comprised largely of endowments, family offices and high net worth individuals, with patient capital.

“There is a market of investors who would like to commit their capital for the longer term and certainly managers who want the flexibility of remaining with businesses beyond the life of a typical private equity fund,” said Marco Masotti, co-head of Paul Weiss Rifkind Wharton & Garrison’s private equity group. Though he added it is “an unusually long period for an investor to remain committed to and locked into for the life of the fund”, if structured as a typical private equity vehicle.

It’s a level of LP patience sure to stir envy in many other fund managers and asset classes.

“This suddenly means that you have a private equity fund boldly achieving a hedge fund-style term,” Roger Singer, a fund formation specialist at law firm Clifford Chance, told PEO. “The hedge fund guys all want what the private equity guys have, which is no redemptions. The private equity guys all want what the hedge fund guys have”, which is the ability to reinvest capital.

If funds with longer lives become a trend, they will shake some fundamentals in the industry, like key man clauses, Singer added.

“Particularly with a 25-year investment, you’re obviously betting that they will pick successors you’re happy with. This flies in the face of a lot of the terms the private equity industry has developed.”